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Holding cost determination: An activity-based cost approach

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  • Berling, Peter

Abstract

We consider the problem of choosing the holding cost in inventory models. Traditionally, the cost of holding inventory is assumed to increase linearly with a rate that is equal to a percentage of the product value. This since the capital cost is believed to make up the main part of the cost. However, recent research indicates that this is not necessarily the case. In the present work, we present a more general model of the cost of holding inventory based on a microeconomic framework. A method for determining a suitable holding cost per unit and time unit, h, which can be used in existing heuristics/formulas is derived. The method is based on the ideas behind activity-based costing (ABC). The suggested method works well in the considered numerical examples (maximum and average cost increase is 1.78% resp. 0.08%). There exist situations where the traditional approach, i.e., setting h as a percentage of the product value, gives rise to a significant cost increase (>15%).

Suggested Citation

  • Berling, Peter, 2008. "Holding cost determination: An activity-based cost approach," International Journal of Production Economics, Elsevier, vol. 112(2), pages 829-840, April.
    • Handle: RePEc:eee:proeco:v:112:y:2008:i:2:p:829-840
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    References listed on IDEAS

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    1. Peter Berling & Kaj Rosling, 2005. "The Effects of Financial Risks on Inventory Policy," Management Science, INFORMS, vol. 51(12), pages 1804-1815, December.
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    Cited by:

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    2. Schulze, Manuel & Seuring, Stefan & Ewering, Christian, 2012. "Applying activity-based costing in a supply chain environment," International Journal of Production Economics, Elsevier, vol. 135(2), pages 716-725.
    3. Jing Wu & Dan Zhang & Yang Yang & Gongshu Wang & Lijie Su, 2022. "Multi-Stage Multi-Product Production and Inventory Planning for Cold Rolling under Random Yield," Mathematics, MDPI, vol. 10(4), pages 1-21, February.
    4. Baykasoglu, Adil & Kaplanoglu, Vahit, 2008. "Application of activity-based costing to a land transportation company: A case study," International Journal of Production Economics, Elsevier, vol. 116(2), pages 308-324, December.
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    6. Askarany, Davood & Yazdifar, Hassan & Askary, Saeed, 2010. "Supply chain management, activity-based costing and organisational factors," International Journal of Production Economics, Elsevier, vol. 127(2), pages 238-248, October.
    7. Tsai, Wen-Hsien & Lai, Chien-Wen & Tseng, Li-Jung & Chou, Wen-Chin, 2008. "Embedding management discretionary power into an ABC model for a joint products mix decision," International Journal of Production Economics, Elsevier, vol. 115(1), pages 210-220, September.
    8. Orlando Durán & Paulo Sergio Afonso & Paulo Andrés Durán, 2019. "Spare Parts Cost Management for Long-Term Economic Sustainability: Using Fuzzy Activity Based LCC," Sustainability, MDPI, vol. 11(7), pages 1-14, March.
    9. Askarany, Davood & Yazdifar, Hassan, 2012. "An investigation into the mixed reported adoption rates for ABC: Evidence from Australia, New Zealand and the UK," International Journal of Production Economics, Elsevier, vol. 135(1), pages 430-439.

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